PENSION FUND OF THE PENSION PLANS OF THE UNIVERSITY OF GUELPH COMBINED FINANCIAL STATEMENTS
March 9, 2011 PricewaterhouseCoopers LLP Chartered Accountants 95 King Street South, Suite 201 Waterloo, Ontario Canada N2J 5A2 Telephone +1 519 570 5700 Facsimile +1 519 570 5730 Auditors Report To the Board of Governors of the University of Guelph We have audited the combined statement of net assets available for benefits of the Pension Fund of the Pension Plans of the University of Guelph (the Plans ) as at September 30, 2010 and the combined statement of changes in net assets available for benefits for the year then ended. These financial statements have been prepared to comply with Section 76 of Regulation 909 to the Pension Benefits Act of the Province of Ontario. These financial statements are the responsibility of the pension plan s management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the Plan s management, as well as evaluating the overall financial statement presentation. In our opinion, these combined financial statements present fairly, in all material respects, the combined net assets available for benefits as at September 30, 2010 and the combined changes in net assets available for benefits for the year then ended in accordance with the basis of accounting as disclosed in note 1 to the financial statements. These financial statements, which have not been, and were not intended to be, prepared in accordance with Canadian generally accepted accounting principles, are solely for the information and use of the Board of Governors of the University of Guelph and the Financial Services Commission of Ontario for complying with Section 76 of Regulation 909 to the Pension Benefits Act of the Province of Ontario. These financial statements are not intended to be and should not be used by anyone other than the specified users or for any other purpose. Chartered Accountants, Licensed Public Accountants PricewaterhouseCoopers refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership, which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity. Page 1
Combined Statement of Net Assets Available for Benefits As at September 30, 2010 (in thousands of dollars) Restated (Note 9) 2010 2009 ASSETS Pooled Fund of University of Guelph Pension Plans (Note 5) 864,442 827,567 Employer contributions receivable 902 800 Member contributions receivable 551 470 865,895 828,837 LIABILITIES Accounts payable (Note 6) 1,815 729 Net Assets Available for Benefits 864,080 828,108 Pension Fund of the Pension Plans of the University of Guelph Combined Statement of Changes in Net Assets Available for Benefits For the year ended September 30, 2010 (in thousands of dollars) Restated (Note 9) 2010 2009 Increase in Net Assets Employer contributions 21,246 14,420 Member contributions 13,071 13,551 34,317 27,971 Investment income 29,972 24,370 Net realized gains 14,052 - Net increase in unrealized gains 8,653 118,161 52,677 142,531 Total Increase in Net Assets 86,994 170,502 Decrease in Net Assets Net realized losses - 97,473 Pension payments 41,025 38,448 Refunds of contributions 8,706 10,080 Administrative expenses and professional fees (Note 7) 1,291 1,404 Total Decrease in Net Assets 51,022 147,405 Net Increase (Decrease) for the Year 35,972 23,097 Net Assets at Beginning of Year as previously reported 828,108 796,241 Prior period Adjustment (Note 9) - 8,770 Net Assets at Beginning of Year as restated 828,108 805,011 Net Assets at End of Year, at Market Value 864,080 828,108 Page 2
1. Significant Accounting Policies Basis of Presentation These financial statements present the net assets under the control of the administrator of the University of Guelph s three pension plans (registered with Canada Revenue Agency and the Financial Services Commission of Ontario, registration #0324616, #0324632 and #0324624). Basis of Accounting These financial statements have been prepared in accordance with the significant accounting policies set out below to comply with the accounting requirements prescribed by the Financial Services Commission of Ontario for financial statements under section 76 of Regulation 909 of the Pension Benefits Act of the Province of Ontario. The basis of accounting used in these financial statements materially differs from Canadian generally accepted accounting principles because it excludes the actuarial liabilities of the plans. Consequently, these financial statements do not purport to show the adequacy of the plan's assets to meet its pension obligations. Change in Accounting Policies During 2009, The Canadian Institute of Chartered Accountants (CICA) amended Handbook Section 3862, Financial Instruments - Disclosures. The amendment included the requirement for enhanced disclosure on the inputs to fair value measurement. This disclosure includes the classification within a hierarchy that prioritizes the inputs to fair value measurement. The hierarchy places the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to inputs not based on observable market data (Level 3). The only impact of the amendment is enhanced disclosure, which has been provided in note 3. As permitted by the transition rules of the amendment, comparative information has not been provided. Pooled Fund The assets of the University of Guelph pension plans are administered as a single Pooled Fund. The value of the Pooled Fund is based on the fair value of the underlying investments. Fair values are determined using listed market values where available or comparable security prices as appropriate. Each of the University of Guelph Pension Plans interest in the Pooled Fund is calculated based on the units held by each Plan in the Pooled Fund. Investment Income Investment income consists of interest income, recognized as it accrues, plus dividend income, recognized as of the ex-dividend date, less investment counsel fees and trustee fees. Each of the University of Guelph Pension Plans pro-rata share of investment income, is calculated based on the units held by each plan in the Pooled Fund. Page 3
1. Significant Accounting Policies (continued) Net Realized Gain (Loss) The net realized gain (loss) is based on the sale of investments, recorded at the settlement date and based on the average cost of the securities. Each of the University of Guelph Pension Plans pro-rata share of net realized gain, is calculated based on the units held by each plan in the Pooled Fund. Contributions, Benefit Payments and Refunds Contributions, benefit payments and refunds are recorded on the accrual basis. 2. Investment Risk Management The objective of the Pension Plans is to achieve medium to long-term growth of its investment portfolio to provide the Plans with assets sufficient to meet member s pension benefit payment obligations. The Plans investment policy is established by the Board of Governors and is set out in the statement of investment policies and procedures (the SIPP). The Plans invest in assets in accordance with the SIPP and are monitored by the Investment Management Committee. The Plans investing activities expose it to a variety of financial risks including market risk, credit risk and liquidity risk. The allocation of assets among various types of investments and the performance of investments held by the Plans are monitored by the Plans investment managers on a monthly basis and reviewed by the Investment Management Committee on a quarterly basis. The Pension Committee oversees how management monitors compliance with the Plans risk management policies and procedures and reviews the adequacy of the risk management framework in relation to the long-term objectives of the Plans. a. Market risk The Plans investments are susceptible to market risk, which is defined as the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. The Plans market risk is affected by changes in the level or volatility of market rates or prices, such as interest rates, foreign exchange rates and equity prices. The sensitivity analysis provided below discloses the effect on net assets available for benefits as at September 30, 2010, assuming that a reasonably possible change in the relevant risk variable has occurred at September 30, 2010 and has been applied to the risk exposures in existence at that date to show the effects of the reasonably possible changes. The reasonably possible changes in market variables used in the sensitivity analysis were determined based on implied volatilities where available or on historical data. Page 4
2. Investment Risk Management (continued) The sensitivity analysis provided is hypothetical and should be used with caution as the impacts provided are not necessarily indicative of the actual impacts that would be experienced as the Plans actual exposure to market rates may change. Changes in fair values or cash flows based on a variation in a market variable cannot be extrapolated because the relationship between the change in a market variable and the change in fair value or cash flows may not be linear. In addition, the effect of a change in a particular market variable on fair values or cash flows is calculated without considering interrelationships between the various market rates or mitigating actions that would be taken by the Plans. i. Interest rate risk Interest rate risk is the risk the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Plans are subject to interest rate risk though its holdings of variable interest rate instruments. The SIPP contains guidelines related to investments in interest bearing instruments, which address credit concentration, duration and distribution. These guidelines are designed to mitigate the interest rate risk at a level deemed acceptable by the Pension Committee. As at September 30, 2010, had the market interest rates increased or decreased by 1% with all other variables held constant, the fair value of the fixed income holdings in the Plans would have decreased or increased respectively, by approximately $16.2 million. ii. Currency risk The Plans hold assets denominated in currencies other than the Canadian dollar, the Plans functional currency. It is therefore exposed to currency risk as the value of the financial instruments denominated in other currencies will fluctuate due to the changes in exchange rates. As at September 30, 2010, had the foreign exchange rates increased or decreased by 10% with all other market variables held constant, the fair value of the foreign currency assets of the Plans would have increased or decreased respectively, by approximately $38.9 million. iii. Other price risk Other price risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices (other than those arising from interest rate risk or currency risk), whether those changes are caused by factors specific to the individual financial instrument or its issuer, or factors affecting all similar financial instruments traded in the market. As at September 30, 2010, had the value of the equity portfolio increased or decreased by 10% with all other variables held constant, the value of equities would have increased or decreased respectively, by approximately $58.1 million. Page 5
2. Investment Risk Management (continued) b. Credit Risk Credit risk is the risk one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation. The Plans manage credit risk through the application and monitoring of its SIPP. The Plans assesses all counterparties for credit risk before contracting with them. The Plans maximum exposure to credit risk is detailed in the table below: [in thousands of dollars] 2010 Cash 26,562 Bonds and debentures 256,601 283,163 c. Liquidity Risk Liquidity risk is the risk that the Plans may be unable to meet obligations in a timely manner. In addition to recurring expenses, the Plans are called upon to meet regular pension benefit payments as well as lump sum transfers that my occur upon retirement or termination of qualifying Plan members. The risk the Plans would be unable to meet such obligations is managed through the Plans ongoing monitoring of the individual investment managers and in their ability to liquidate investments in which the Plans have invested. The risk in this area is assessed by the Plans to be insignificant. 3. Fair Value Measurement Financial instruments measured at fair value are classified according to a fair value hierarchy that reflects the importance of the data used to perform each evaluation. The fair value hierarchy is made up of the following levels: Level 1 Unadjusted quoted prices in an active market for identical assets or liabilities. Level 2 Inputs other than quoted prices under Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 Inputs based on unobservable market data. The following is an analysis of the investments of the Plan using the hierarchy related to the inputs to fair value measurement. a. Cash Cash is classified as Level 2. Page 6
3. Fair Value Measurement (continued) b. Short-term notes and treasury bills Short-term notes and treasury bills are classified as Level 2. These instruments mature within one year and are stated at cost, which, when combined with accrued interest income, approximates market value. c. Bonds and debentures Bonds and other interest bearing securities are classified as Level 2 when they are actively traded. They are classified as Level 2 when they are valued using observable inputs, including interest rate curves, credit spreads and volatilities. Bonds for which significant unobservable data is required in determining fair value are classified as Level 3. d. Equities & Private equity funds The Plans equity positions are classified as Level 1 when the security is actively traded and a reliable quote is observable. Certain of the Plans equities do not trade frequently and therefore observable prices may not be available. In such cases, fair value is determined using observable market data (e.g., transactions for similar securities of the same issuer) and is classified as Level 2, unless the determination of fair value requires significant unobservable data, in which case the measurement is classified as Level 3. The fair value hierarchy requires the use of observable data from active financial markets each time such data exists. Where a financial instrument contains inputs from multiple levels, it is classified at the lowest level of the hierarchy for which significant input has been considered in measuring fair value. The following table presents the Plans financial assets evaluated at fair value as at September 30, 2010, classified according to the fair value hierarchy described above: [in thousands of dollars] Level 1 Level 2 Level 3 2010 Total Canadian Cash & Cash Equivalents 12,724 12,724 Bonds and debentures 254,607 254,607 Equities 198,326 198,326 Private equity funds 1,699 4,417 6,116 Foreign Cash & Cash Equivalents 13,838 13,838 Bonds and debentures 1,994 1,994 Equities 376,784 53 376,837 575,110 284,915 4,417 864,442 There were no changes in the Plans Level 3 fair value measurements during the year ended September 30, 2010. Page 7
4. Management of Capital The capital of the Plans is represented by the net assets available for benefits. The University s objective when managing the Plan s capital is to safeguard the assets of the Plans to support the Plans investment objectives. Investment performance and asset allocation is reviewed by the Investment Management Committee of the Board of Trustees and is reported to the Pension Committee. 5. Pooled Fund of the University of Guelph Pension Plans (a) The quoted market values of investments in the Pooled Fund, related accrued interest and dividend income receivable, and accrued investment counsel and trustee fees payable as at September 30, 2010 and September 30, 2009 are as follows: [in thousands of dollars] 2010 2009 Canadian Cash & Cash Equivalents 12,724 23,190 Bonds and debentures 254,607 252,249 Equities 198,326 199,344 Private equity funds 6,116 6,115 471,773 480,898 Foreign Cash & Cash Equivalents 13,838 9,328 Bonds and debentures 1,994 4,093 Equities 376,837 333,248 392,669 346,669 Total market value of Pooled Fund net assets 864,442 827,567 Fluctuations in the comparative figures noted above reflect changes in both asset mix and year end market values of securities held in the Pooled Fund. The book value of assets held in the Pooled Fund at September 30, 2010 was $813.8 million (2009 - $785.6 million). The unrealized gain at September 30, 2010 was $50.6 million (2009 - $41.9 million). Page 8
5. Pooled Fund of the University of Guelph Pension Plans (continued) (b) The Individually Significant Investments The book or market value of the following investments exceeds 1% of the book or market value of total pension fund assets at September 30, 2010. [in thousands of dollars] Book Market Canadian Bonds & Debentures Canada Housing Trust 37,165 38,188 Government of Canada 74,777 77,764 Province of Ontario 12,869 13,759 Province of Quebec 9,792 10,417 134,603 140,128 Canadian Stocks Royal Bank of Canada 7,906 9,407 Suncor Energy Inc. 8,131 9,583 Toronto Dominion Bank 6,943 9,774 22,980 28,764 Total 157,583 168,892 6. Accounts Payable [in thousands of dollars] 2010 2009 Refund of contributions plus interest 577 160 Administration fees to the University of Guelph 1,053 431 Professional fees (actuary, audit, legal) 145 104 Provincial regulatory fees and Pension Benefit Guarantee Fund 40 34 1,815 729 Page 9
7. Administrative Expenses and Professional Fees [in thousands of dollars] 2010 2009 Pooled Level Fees Investment Management Fees 3,454 2,595 Custodial and Performance Management Fees 442 540 3,896 3,135 Plan Level Expenses University of Guelph Administrative Fee 622 615 Professional Fees: Actuarial Fees 557 581 Legal, Accounting and Auditing Fees 33 39 Other Fees* 79 169 1,291 1,404 Total Administrative Expenses and Professional Fees 5,187 4,539 * includes Provincial regulatory fees and Pension Benefit Guarantee Fund. 8. Related Party Transactions [in thousands of dollars] During the year ended September 30, 2010, the University of Guelph charged the Pooled Fund $622 (2009 - $615) for administrative services. 9. Prior Period Adjustment During the year the University of Guelph discovered that amounts had been accrued as owing to plan members who were members of the plan and had not submitted application for refund. As a result, amounts were incorrectly recorded as refunds of contributions in the Statement of Changes in Net Assets Available for Benefits and as accounts payable in the Statement of Net Assets Available for Benefits. The effect of the correction of error done retroactively with restatement is summarized below: [in thousands of dollars] 2009 2009 (restated) Accounts payable 8,861 729 Refunds of Contributions 9,442 10,080 Net Assets available for benefits - Beginning of year 796,241 805,011 Net Assets available for benefits - End of year 819,976 828,108 10. Comparative Numbers Certain comparative numbers have been reclassified to conform to the current year presentation. Page 10